Источник
I'm Stephanie Flanders, the BBC's economics editor. This is my blog for discussion of the UK economy, how it relates to the rest of the world, and how it affects us all.
Выбор редакции
12 мая 2011, 16:25

Moving on

  • 0

Stephanomics is dead. Long live Stephanomics. Today's news is that this blog is moving to a new home with a fresh format. I know, change is hard, but they tell me it's going to better - and if it isn't, I know you'll be the first to tell me. At least all my work will be in one place - including my video, audio, news stories and, soon, my tweets. This is where you'll find me from now on. Remember, it's not goodbye. Just a change of scene.

Выбор редакции
11 мая 2011, 18:34

Inflation up. Growth down. Uncertainty everywhere

  • 0

You don't go to Inflation Report press conferences nowadays to get cheered up. The "news", if we can call it that, is that the Bank's Monetary Policy Committee (MPC) now thinks inflation will be significantly higher than they previously thought, not just in 2011 but in 2012. Indeed, if reality - by some freakish accident - follows the path suggested by the new forecast, the target measure of inflation will still be within shouting distance of 3% a year from now. This won't come as a surprise to many, though the sharp rises in utility prices which underpin the new forecast will come as a shock to consumers who hoped the period of rising energy bills might soon be over. The chart below (Chart 5.2, Chapter 5, page 39) shows the range of possibilities now for inflation in the second quarter of 2012 (in red) compared to the forecasts the Bank drew up in February (marked by the grey line). This shows clearly how the distribution has shifted, with a mid-point close to 3% instead of 2%. As usual, every word the MPC or Mervyn King says on this subject comes laden with caveats and reminders of the uncertainty that surrounds them. But other things equal, the implication of this new forecast is that real wages will be further squeezed in 2012. Indeed, the Bank needs "other things to be equal" - needs nominal wages not to respond to this extra bout of inflation - for the rest of its forecast to be realised, and inflation to fall back to target by the middle of 2013. A similar chart for GDP (page 41, if you're interested) shows the Bank has not made such large adjustments to its growth forecasts, though the picture is somewhat weaker than before. There was much discussion in the press conference of what the governor was pleased to call the "soft patch" in the recovery: whether it would last, and what the long-term impact might be for the level of national output in a few years' time. On this, the Bank is still on the more optimistic side of the spectrum; it thinks growth in the first quarter was probably stronger than the ONS figures suggest (yes, it's that construction output puzzle again), and that the recovery will probably get back on track over the next six months. But, as I keep saying, what counts as an optimistic forecast these days is pretty anaemic by historical standards, and compared to the Bank's own forecast, only a year ago, of growth this year of nearly 3%. Also, though the path of the recovery from here might not be very different before, we will be starting from a lower base. In that sense, the Bank is saying that the ground lost at the end of last year will not be quickly made up. To quote the report: "The projection for growth implies a lower level of GDP than was judged probable in February. Given the observed weakness in productivity over recent quarters, the Committee judges that the outlook for productivity, and so for the supply capacity of the economy, is also weaker than in February." Productivity has been unusually weak since the start of the recession, reflecting the fact that employment has held up even as output has gone down. The Bank thinks that part of the shortfall in productivity will never be regained - in other words, output per worker might be permanently lower as a result of this crisis, with, potentially, long-term consequences for national income as well. But the Bank does think that companies have some room to expand productivity and output at limited extra cost. That is what is known as spare capacity. However, it's also possible that firms will try to regain their lost productivity another way, by simply laying off workers they have previously tried to keep on. Long-term, that might not be disastrous for national output (if the higher productivity ultimately generates higher demand) but it would have pretty undesirable short-term consequences for the labour market. So much for the big picture on growth and inflation. The other thing that jumped out at me was the governor's comments on the relatively high cost of bank funding and how this was influencing monetary policy. As this second chart shows, the marginal cost of money, if you are a bank, is much lower now than it was at the height of the crisis. But the gap between the rate banks pay and the official base rate is still high by historical standards. It's no secret that this was a key factor behind the MPC's decision to cut the official interest rate so dramatically, and keep it at this low levelfor so long. But it was interesting to hear Mervyn King spell out that the future level of interest rates would be dependent, not just on the state of the economy but also on the state of the wholesale market for bank funding. As he said, if the gap between the official Bank rate and the actual cost of funds for banks starts to narrow, that would suggest that the official interest rate would need to go up, merely to keep the stance of monetary stance unchanged. (If the Bank rate didn't go up, in those circumstances, that would mean policy had been loosened, assuming that banks pass on the fall in the cost of money to their customers or their shareholders.) It's always been technically true that the market price banks pay for their money will affect the interest rate they offer to us - with consequences, in turn, for the way that the MPC thinks about the level of the Bank rate. But it's rare that the gap between these three should be so consequential for policy.

Выбор редакции
11 мая 2011, 14:57

Greek lessons

  • 0

Here's what I learned from spending almost an entire day in Greece. First, most Greeks I spoke to don't want the country to default on its obligations, and the average person there probably has a better idea of what a default would mean for the country in the short-term than some of the outsiders who blithely recommend it. Of course, that's especially true of anyone close to the financial system. But reformers - inside and outside the government - suspect the political cost of default could be equally high. To their mind, the debt crisis has forced a once in a generation opportunity to push through long overdue reforms. As and when the debt burden is lifted, they worry that this great window of reform opportunity will close as well. That may explain why - as I mentioned on the Today programme this morning - the government is still, amazingly, a little ahead in the opinion polls. Austerity has few fans, but so far the opposition has not persuaded the voters that there is a better alternative. But all of this is about the short-term. Another observation from my brief time in Greece is that even the most committed optimists question whether the government can get to the end of the IMF programme without some form of debt restructuring. Put simply, no country has ever achieved the fiscal and economic turnaround the government has committed itself to without either a default or a currency devaluation. Usually both (though I wouldn't lay bets on Greece leaving the euro). The fact that everyone - inside and outside Greece - expects a debt restructuring in the future is precisely why the Germans and some others are keen to see voluntary "re-profiling" of privately held Greek debt this year. They don't want most of the private bondholders - holding debt that matures in the next year or so - to get out, leaving mainly governments and official institutions bearing the brunt of a default after 2012. But of course, it is that same logic that will make it hard to persuade private investors and institutions to take on longer term debt "voluntarily". They want out as much as the governments want them in. If Greece does have to go down the re-profiling road, Greek bankers are terrified that the ratings agencies will consider it a "selective default", and they will no longer be able to use Greek debt as collateral for funds from the European Central Bank. A lot of energy - inside and outside Greece - is now being devoted to establishing whether this can be avoided. Meanwhile, the underlying drumbeat in Athens seems much the same as it is elsewhere - "Lord gives us a Greek default, but not yet." Update 14:39: I hoped my ironic reference to being in Greece "an entire day" would suggest humility - and act as a health warning for what followed. But it appears that many of you took it literally. To be clear: I do think there's a limit to what anyone can discover about a country in a single day. I do not think 24 hours is a long time.

Выбор редакции
10 мая 2011, 14:15

Why the Greek bail-out has worked

  • 0

Everyone says that heightened talk of a Greek default is proof that last year's bail-out has "failed". But you could make a strong case for the opposite. In reality, all that the Greek support programme last year was ever going to do was buy time. And that is exactly what it has done. It just hasn't bought quite as much as governments hoped. As I said in my last post, officials are agreed that Greece needs more support. The only issue is what form this takes - and how many hoops the government has to jump through to get it. Germany is also looking for voluntary re-profiling of privately held debt along the lines that I described yesterday as part of the deal. (Though it's far from clear that can happen on the timetable available). Even the non-eurozone officials who have been most exasperated by Europe's management of the crisis would accept that governments were right a year ago to kick the Greek problem down the road and buy the system some time. One year on, they are roughly back where they were, facing the same choice. What's changed, from a Greek standpoint, is that its government is now much less popular than it was, and it now has even more debt to repay. For the rest of the eurozone, the key differences between now and then are that a much larger share of Greek debt is now owed to official institutions (notably the European Central Bank), and that outside the periphery, Europe is enjoying a decent recovery. Put it another way: Greece looks less able to repay than it did a year ago - while the system as a whole looks in better shape to withstand a default. For some, these new dynamics shift the balance in favour of facing up to the reality of an involuntary restructuring or Greek default. Officials should stop fighting it, on this view, and instead focus on limiting the collateral damage, by recapitalising the banks that will be hardest hit (notably the Greek, French and German). They also need to have a credible line on what will happen to the sovereign debts of Portugal and the Irish Republic. That is the voice you hear in the markets these days. I am in Athens today, and so far that is also what I am hearing from people here. But most of the eurozone officials who would actually have to deal with the fallout from a Greek default - and the blame, potentially, for another Lehmans - see things differently. From their perspective, buying time has worked for the eurozone. It just hasn't been working out so well for Greece.

Выбор редакции
09 мая 2011, 21:14

When is a default not a default?

  • 0

Outside of wartime, serious governments don't default. And if they do, it's a seismic market event. That's why the European authorities will do everything to prevent Greece from going down that path. But there are plenty of ways to lower a country's debt burden which stop short of a formal default. The question is whether the more benign, voluntary approaches to restructuring can be done quickly enough, or deliver enough relief to the hard-pressed Greeks. Officials have been looking into this privately since at least the G20 Summit in Seoul; some would say, since the Greek bailout was announced just over a year ago. In fact, there has already been a restructuring of Greek debt, in the decision to lower the interest rate and lengthen the maturity on the bailout funds that Greece signed up for just over a year ago. A coalition of 17 Now further market pressure and some enthusiastic German reporting has brought the discussions into the open, and made them a good deal more urgent. David Cameron and Nick Clegg think they have trouble; they should consider what it would be like to be in a coalition of 17. You can see why the big players would try to get together privately on Friday to see if it was possible to agree the outlines of a solution for Greece - even at the cost of irritating the excluded countries and further riling the markets on the subject of Greece. Did they come to a magic solution? No. But they reconcile themselves to two basic realities - which many in the markets would consider the blindingly obvious. First, Greece will not be able to go back to the traditional sovereign debt market in the second quarter of 2012, as previously hoped. Second, and most difficult for the Germans, the Greeks are going to need more official support, with or without any voluntary restructuring - or "re-profiling" - of shorter term Greek government bonds which are held by the private sector. Re-profiling would mean the principal (the initial amount that was borrowed) would remain the same, but the maturity is extended by, say, 5 years. In theory, investors agree to the exchange because the net present value stays the same. Financial carrots These solutions can work - for example, Uruguay pulled it off, with not much trouble, in 2003. But most of the holders of this debt are not indifferent to the maturity of the debt they hold, or the risk of further restructuring down the road if they continue to hold Greek bonds. You'd probably have to offer various carrots for them to sign up, for example exchanging the debt at a market premium. You'd also have to be fairly confident that this would not constitute a "credit event" for the purposes of credit default swaps and other contracts which are entered into to insure against - or more likely speculate on - a Greek default. In other words, such voluntary approaches could work for Greece - but they would take time, and - crucially, from the bondholder's perspective - they wouldn't necessarily deliver enough relief to prevent the government from coming back for more. Three options for Greece Realistically, that leaves three options for lowering the Greek government's short-term debt problem: further successful privatisation of assets by the Greek government (over and above the very large asset sales already included in the IMF programme, on which the government has made limited progress); further official support from European partners, including further "re-profiling" of official loans; and/or involuntary restructuring of private debt, including, possibly, an outright default. On recent performance, the first of these, which involves more heroic effort by the Greek government, in an economy in which it's far from clear what public assets are worth - seems the least likely, at least in the short term. The question is whether fear of the third possibility - a disorderly repudiation of the Greek government's obligations - can induce the German coalition to support the second option, which is yet more official support. On the basis of the past year, you have to assume that the Germans will sign up to giving Greece more help. After all, that's what they've done every other time so far such a choice has presented itself. But it would help them if the European Financial Stability Facility (EFSF) could provide the help - for example, by buying Greek debt directly when it is issued next year. That would be deeply preferable to the Germans, since it would avoid the need to go once again to the parliament, and the German taxpayer. Delaying tactics Will that be agreed by next week's Ecofin meeting? Perhaps. But the odds are against it. Here are too many details to be sorted out - and face-saving conditions and caveats to be devised by all involved. However, the consensus coming out of Friday's meeting seems to have been that something would have to be sorted out before the IMF completes its next review of the Greek programme, in the middle of June. No-one thinks that will be the end of the Greek saga. But it would have the great advantage - common to all past "solutions" to the Eurozone crisis - of delaying the day of market reckoning a little longer.

Выбор редакции
06 мая 2011, 18:25

Commodities: 'epic rout' or the new normal?

  • 0

The "epic rout" in commodity markets in recent days has left some traders and investors in a state of shock. But, if the damage turns out to be localised, Ben Bernanke will consider it useful - and we probably should as well. The fall in prices - which has pushed the main US benchmark price of oil below $100 a barrel and saw the biggest ever one day fall in the price of Brent crude - has been linked to fears about the pace of the global recovery. That isn't good news. But nor is it strictly news. The economic statistics have been showing signs of weakening in the real economy in the US and Europe for several weeks. The question is whether falling commodity prices make the situation better, or worse. Again, assuming there's limited collateral damage to the broader financial system, the answer ought to be better, for two reasons. First, remember that one of the reasons we've been worried about the pace of recovery in the big advanced economies has been the rising price of oil and the rest, and the knock-on effect for inflation at a time when central bankers would rather not be raising rates. It's early days yet - I wouldn't assume that the oil price will stay at this level. But if the global price of oil averages, say $110 a barrel over the next year or two, and not the $120 forecasters had been pencilling in, that could take about 0.2 percentage points off the rate of inflation in 2011 and 2012, relative to what was previously thought. If you're the ECB or the Bank of England, or the Federal Reserve, every little helps. The other reason why Ben Bernanke and other central bankers will not be unhappy to see this week's price falls is that it suggests the first stage of unwinding the US central bank's emergency support for the US financial system is already quietly under way - and having the desired effect. Though the ECB is the only major Western central bank to have formally raised interest rates, central banks around the world have been quietly mopping up some of the short-term liquidity that's been injected into the market since 2008. By signalling firmly that there were no plans for QE3, Ben Bernanke has made clear that the US is on that path as well, assuming there's no big market shock between now and June to make him re-think. If the fall in commodity markets is part of the markets taking this information on board, Mr Bernanke and his central bank colleagues would probably think that was all to the good. In the current circumstances, the past few days of commodity market mayhem may actually be what "normalisation" looks like. However, a lot depends on how long this price tumble continues - and the impact on other parts of the system. Some have drawn comparisons with the spectacular fall in commodity prices in the early summer of 2008 after an equally dramatic run-up. This played an important role in the Lehmans meltdown a few months later: depending on whom you talk to, perhaps a decisive one. The hope is that the past few days show the global economy moving further away from crisis and the emergency policies that it produced - NOT a premonition of another downward lurch. But we're all learning that nothing about this global recovery can be taken for granted.

Выбор редакции
05 мая 2011, 20:58

ECB: Clearing the way for an Italian hawk?

  • 0

Jean-Claude Trichet was more dove-ish than expected in his press conference today after the European Central Bank's (ECB) latest meeting. The city was surprised, but Mario Draghi may come to be grateful. You might not have taken Trichet for a dove, listening to his stern words about the "upside" risks to inflation. But in the strange world of ECB-watching these days, it's not what is said, but the precise words that are used to say it. To give a sense where this has got to, let me quote part of a note from Barclays Wealth, explaining why the ECB president's opening statement suggested that a June rate rise was not on the cards after all. (This is no dig to the author - I've received plenty of similar emails since Mr Trichet sat down.) "The ECB's introductory statement did not include the phrase "strong vigilance". It did refer to conditions being "still accommodative". We had expected "very" accommodative to be used (as opposed to plain "accommodative" last time), and were not (on balance) expecting use of the phrase "strong vigilance". In our view, the use of "still" here is much the same as re-insertion of "very" would have been: it implies that the expression can be revised to "vigilance" at the next meeting on 10 June. We continue therefore to look for a 25bp rate increase at the 7 July policy meeting, with this signalled at the 9 June meeting by using the word "vigilance"." So, I hope that's clear. Before the meeting, people expected the ECB to raise interest rates at least twice more in 2011, with one rate rise in June and the other perhaps in September. After today, the city doesn't expect another rise before July, with the next one perhaps not arriving until the winter. If that's the correct reading - and it probably is, given that the ECB has previously been eager to participate in this game of "spot the missing adjective" - then two conclusions follow. The first is that the ECB is taking seriously recent signs that the Eurozone recovery is losing momentum, particularly outside Germany. And it's not been unduly spooked by the jump in eurozone inflation to 2.8% in April, the highest in two and a half years. Trichet's pointed comments about the dollar suggests a concern for the rising Euro as well. Lest we forget, the eurozone - particularly the periphery - is relying on an export-led recovery as well. The second point - more speculative - is that the delay in the second rate rise might prove helpful to his likely successor. It now seems all but certain that the distinguished Italian technocrat, Mario Draghi, will take over from Mr Trichet in November. What could be better, if you are the first Italian to stand as the guardian of European price stability, than to begin your time in office by raising interest rates? It's a frivolous point, perhaps. Not to mention highly speculative. But there's a serious-ish point underneath. At a time when every rate rise makes the countries on the periphery wince (and every rise in inflation makes German housewives curse the loss of their beloved D-mark), there was plenty of nervousness about the possibility of a German taking the helm at the ECB. Especially a well known hawk such as Axel Weber, who was the front-runner until he surprised everyone earlier in the year by announcing he would stand down. But think about it. Precisely because of his background and reputation, Axel Weber would have come in needing to prove he would put Europe first and Germany second. The pressure on Draghi will be exactly the opposiite. If you're sitting in Spain and Portugal, you might well wonder whether you would have been better off with a German in charge, trying to show off his inner Italian - than an Italian desperate to prove he's German underneath.

Выбор редакции
04 мая 2011, 17:20

Third time lucky for Portugal - and the eurozone?

  • 0

What's the difference between a developing country financial crisis and a European one? The answer is that emerging market crises are usually done and dusted in a matter of weeks - whereas in Europe they really like to drag things out. Watching the eurozone these past two years has been like watching a car crash in really, really slow motion. It was more than two years ago that senior policy makers - on both sides of the Atlantic - started worrying about a European "leg" of the financial crisis that peaked in the autumn of 2008. European policymakers were urged to think long and hard about the state of their banks, and the deep financial and economic imbalances that had built up in the first 10 years of the single currency - and how they would respond, if and when, these vulnerabilities came to a head. By and large, these pleas were ignored. European officials preferred to offer short-term support for their banks and their economies - and hope that their long-term weaknesses would quietly go away. Surprise, surprise, that didn't happen. Now Portugal is the third eurozone country to be asked to resolve the single currency's contradictions the hard way. Unlike the other countries in the mix, Portugal does at least have recent experience of negotiating with the IMF. This will be its third emergency loan from the Fund in the past 34 years. It also had help in 1977 and 1983. In announcing this deal, the caretaker Prime Minister, Jose Socrates, suggested that the terms of the bail-out were less severe than they had been for the Republic of Ireland and Greece. He is in the middle of an election campaign - we can't know whether that's true until we see more details, notably the interest rate being charged and the structural conditions. But there's a reason why Portugal was the third in line for a bail-out, not the first: its fiscal situation is not nearly as bad as the Greeks', and its financial system is not nearly as weak as the Republic's - and has not infected the sovereign balance sheet to anything like the same extent. (Though we expect that up to 20bn euros of the 78bn euros will earmarked for the banks.) It would be surprising, in these circumstances, if Portugal's programme was as tough as the others. But the word is that there will be plenty of structural reforms included in the agreement, including pensions and the labour market, even if the specific areas listed by Mr Socrates have been saved (for example, he suggested there would be no change to the minimum retirement age - which would be surprising, if true). The few details we do have, showing the budget deficit falling from 9.1% of GDP in 2010 to 3% in 2013, suggest it is tough enough to be getting along with, at least by the purely macroeconomic yardstick of how far the government is being squeezed. If that timetable appears more generous than it might have been, that is largely because the starting deficit is larger than previously thought. Remember, until recently, we thought the budget deficit in 2010 would 'only' be 7% of GDP. When you take the higher starting point into account, the pace of deficit reduction is not much slower than the government originally planned. And pretty ambitious, too, when you consider that the EU and the IMF expect the Portuguese economy to shrink by 2% in 2011 and in 2012. As I noted a while ago, the countries in trouble in the eurozone have a debt problem and a competitiveness problem, and you can't solve one without trying to address the other. As I said then, if one were starting afresh with the single currency, you would want an effective way to manage sovereign debt restructuring. You might also want to think about economic policies which would make it easier for the less developed members of the eurozone to improve their competitiveness without having to suffer years of economic stagnation. Of course, the eurozone was not starting from scratch in the spring of 2009. But in the past year the debt problem has at least been extensively discussed, even if it is far from being resolved. By contrast, the serious consideration of how countries like Portugal are going to achieve economic growth in the current environment has barely begun. As Greece, Portugal and others have been finding out, a lack of growth can undermine the credibility of a bail-out programme just as quickly as a lack of political resolve.

Выбор редакции
28 апреля 2011, 03:16

Ben and the Fed's excellent adventure

  • 0

The Federal Reserve chairman's first regular press conference in the US central bank's 98-year history was supposed to make more news when it was announced than when it actually took place. And so it proved. There was nothing much to rile the markets in Ben Bernanke's comments - on the dollar, interest rates or the US deficit. The news, such as it was, had come earlier, in official confirmation that the second round of quantitative easing would be completed, on schedule, by June. Oh yes, and central bank has revised down its US growth forecast for 2011, from a midpoint of around 3.65% to 3.2%. (We should be so unlucky.) Here were the few nuggets from the press conference that caught my ear. First was the gloomy tone on inflation, in what seemed to be almost a throwaway comment from the Fed chairman. Officially, the Fed does not think that inflation poses a long-term risk to the economy, and it does not see any immediate reason to tighten policy to confront it. That was what the markets took from the official statement. But Bernanke had this to say, later on, when asked whether the Fed could, or should, be doing more to raise employment: "... the trade-offs are getting less attractive at this point. Inflation is higher... inflation expectations are higher, and it's not clear we can get additional improvements in payrolls without extra inflation risk... in my view if we're going to have a sustainable recovery with healthy job growth, we need to keep inflation under control." The UK's Monetary Policy Committee would surely agree. Though the Bank, unlike the Fed, doesn't have a dual mandate to achieve high employment as well as low inflation. Mervyn King, Charlie Bean and the rest would also be pleased to hear Bernanke echo their "stock" view of quantitative easing, where the stimulative effect comes not from the speed of bond purchases, but the scale. The Fed chairman took the opportunity to spell this out, once again to journalists. In line with market speculation, Bernanke suggested that the first and most likely step towards the exit would be to stop reinvesting in the market as the bonds mature, but he underlined that this step wouldn't be a mere formality, but a conscious step toward tightening, which would need to be based on the economic outlook in the same way that a rise in interest rates would. Finally - and most interesting, perhaps, to a UK audience - the Fed chairman was asked about the risk that US spending cuts to tackle the deficit would hurt the recovery (the questioner did mention the UK as an example). Bernanke started by affirming that cutting the deficit was the "single greatest priority" facing the US, which he hoped the recent warning from the ratings agency Standard and Poor's would help underscore. But then he said this: "My preference would be for taking a long-term perspective. If [Congress] can make credible commitments to cutting programmes over a long period of time, that seems to be the most constructive way to address what is a long-term problem. If [the cuts] are focused entirely on the short run, they might have consequences for growth" (which the Federal Reserve would take into account in setting its policy going forward). I suspect even Ed Balls would hesitate to turn this into a full-fronted assault on coalition policy. The last time he tried to do that, after a similar comment by the US treasury secretary at Davos, Timothy Geithner miraculously (as it happens, directly after meeting Mr Osborne) decided to offer up a full endorsement of the coalition's strategy in an interview for the BBC. But it's an interesting comment for a fairly hawkish Fed chairman to make. I don't think Mervyn King will be taking lessons in giving press conference from Mr Bernanke any time soon. But it was a decent performance - and an important step toward Fed transparency. Not so long ago, the Fed didn't even think it necessary to inform the public when its monetary policy had changed. The rest of us can think about what it would be like to live in an economy expecting "subpar" growth this year of 3.3%.

Выбор редакции
27 апреля 2011, 15:56

GDP: Slow but not stagnant

  • 0

For once, the first estimate for growth in the first quarter is in line with expectations - but it would be hard to argue that it's good news. Not so long ago, many were hoping for a strong bounceback from the slowdown at the end of 2010. Instead, the figures suggest that the UK economy has barely grown at all since the summer. However, even more than usual, it's important to look behind the headline. If you look at the performance of individual sectors you come away feeling more upbeat: important parts of the economy are doing quite well, even as others are struggling to move ahead. As I said on the Ten O'Clock news last night, the economy's not doing nearly as well as we would hope, this far into a 'normal' recovery. But very little about the last few years has been normal. When you look at the sectoral breakdown of today's figures the picture is one of modest growth, but not (yet) stagnation. Let me just flag up three points about today's figures. The first, and most obvious, point to note is that the construction sector has - once again - made an out-sized contribution. I have discussed the role of construction in the output numbers before. The new GDP figures show a 4.7% drop in output in this sector in the first quarter - the largest quarterly fall since the first quarter of 2009, in the middle of the recession. Were it not for this sharp decline in a sector accounting for just 6% of national output, today's GDP figure would not be 0.5%, it would be 0.8%. Is there anything fishy about these numbers? My conversations with construction companies and people involved in the construction products industry suggest there might be. It's not so much that the figures are wrong - but that they might be running 4-6 weeks out of date. As I've noted, for just over a year the ONS has been using monthly figures for construction output, rather than quarterly ones. The statisticians believe that these are not just more timely but also, possibly more accurate, but the series didn't exist until January 2010, so no-one can say for sure what impact the change might have had. The answer might be that it doesn't make any difference at all - in the long run. But as Dr Noble Francis, economics director at the Construction Products Association, points out, it's easy for contractors to know the value of new orders received in a given month - they just add up the value of the contracts. Estimating the value of their output in that same month is trickier; all they really know is what they've been paid for, which would usually be work done 4-6 weeks before. When the figures were quarterly, it's plausible that more of the difference between the two figures used to get ironed out in the figures presented to the ONS. This tallies with the numbers we've seen in the past few months, which showed extremely sharp declines in construction output in January and February, even when the weather was fine and the PMI and other surveys suggested that business was fairly brisk. But the official numbers did then show a sharp bounce back in construction in March. If Dr Francis is right - that strong March figure contains a lot of business carried out in January and February, and the pace of activity on the ground was stronger in the first quarter than the ONS suggests. But I should add that no-one in the construction business is expecting 2011 to be a banner year, with public investment falling off a cliff and private construction still looking subdued. Second, the productive side of the economy is still doing well, with output now 2.6% higher than in the first quarter of 2011. That's the fastest growth in that part of the economy for quite a long time, though there are signs that the pace of the recovery is starting to slow. Simon Ward, of Henderson Global Investors, has the most upbeat take on the figures. "Combined services and industrial output, accounting for 93% of GDP, rose by 0.8% in the first quarter, more than recouping a 0.4% fourth-quarter loss. Monthly estimates, moreover, imply that March output was 0.3% above the first-quarter average, so the second quarter may record a 0.3% gain even if activity is static between March and June. The notion that the economy has been growing at or slightly above trend is consistent with a steady rise in aggregate hours worked and an erosion of spare capacity reported in business surveys, including the Bank of England's agents' survey." But, for all the silver linings, there's a still a sizeable cloud hanging over these figures, and it's called the UK consumer. We won't have a direct measure of household consumption in the first quarter for a while, but even before these figures came out, you could say the household sector was technically back in recession, with household consumption falling in both the third and fourth quarter of 2010. Indeed, some would say there had been no recovery for households in the first place: this measure of consumption barely grew at all in 2010. Today's figures show services up 0.9% on the quarter, but only slightly up on the third quarter of 2010, and only 1.1% higher than a year ago compared with 1.8% growth for the economy as a whole. Looking at the consumer confidence figures and the noises coming from the High Street it's difficult to see this part of the economy gaining a lot of momentum in the next few months, while most industrial surveys suggest that part of the economy might be starting to slow. To repeat, the figures show a relatively slow moving economy, not a stagnant one. But they are a disappointment to anyone - like the Treasury and the Bank - who had hoped this second year of recovery would be stronger than the first. Interest rates are now much less likely to go up - and, rightly or wrongly, the sound you hear in the City these days is that of 2011 growth forecasts being revised down.

Выбор редакции
26 апреля 2011, 19:36

Swan song for a hawk

  • 0

Andrew Sentance has been voting for higher UK interest rates for nearly a year. Today, in what reads like his final speech as a member of the Monetary Policy Committee, he offers a cogent defence of his position. As Sentance says himself, this is not a question of tactics. The fact that he has been in the minority for so long on the committee reflects a substantial difference of view about the prospects for inflation and growth in the UK and - crucially - the role of UK monetary policy. Even the doves on the MPC would have to admit that his arguments have strengthened in the past year, if not in the past few weeks. He thinks the doves are wrong on four big issues. First, he thinks it is both wrong and inconsistent with past MPC policy to assume away "global price shocks" such as higher commodity prices when setting interest rates. I have looked at this issue, at length, in a previous post (see "A Case of Asymmetry?") Suffice to say that Sentance thinks the upward pressure on prices from this source is likely to carry on for a while, and ought to command a response from the Bank. Second, and more controversially, he thinks the Bank should not have been so relaxed about the fall in the pound, which has added to inflationary pressures at a very inconvenient time and, by squeezing disposable incomes, actually "offset the boost to growth we might be seeing from improved trade performance." His remarks here chime with recent gloomy comments about the loss of Britain's manufacturing base, with big firms complaining that they have no domestic component suppliers to turn to, to take advantage of the weaker pound. This is something the Bank recently investigated for itself, with depressing results. Here's Sentance again: "..it is not clear that the export-based manufacturing activities which could benefit from a large depreciation have the capability to respond quickly by scaling up output - particularly when their demand is already being boosted by a recovery in global demand." Put bluntly, he thinks the bank has allowed the pound to fall further than is "necessary or desirable to support the growth of manufacturing and exports." He says that allowing sterling to rise by about 10% from its current level against the euro (£1 = 1.13 euros) would still leave it at a relatively competitive level by historical standards. You may disagree with him. I suspect Mervyn King does. But you'd be silly to dismiss out of hand the views of a man who has spent much of his professional life as an economist considering the strengths and weaknesses of UK industry. The third big area of disagreement is more familiar: the amount of spare capacity in the economy, which he thinks the doves are over-estimating. Here he has one weak argument and one strong. The weak argument is that OECD estimates of the output gap since the mid-1990s have been consistently revised down - in other words, that the economy has consistently turned out to have less room to grow than we thought. While factually accurate, I don't think it tells us about the underlying capacity of the UK economy so much as it tells us that forecasters have often mistaken the cycle for the trend and even more often turned out to be wrong on the question of how fast the economy could grow. That's why discussion of the output gap is usually so fruitless. Even years after the fact, you simply never know how much of the economy's growth was "structural" and how much due to short-term policies. Indeed, the closer you look at the distinction between the two, the more slippery it seems. In the late 1990s we had less capacity than we thought - because domestic inflationary pressures were being offset by falling world prices. But arguably, we made the same mistake, in reverse, coming out of the recession in the early 1980s. And Adam Posen would argue that Japan's big mistake, coming out of its financial crisis, was to underestimate its potential. The much stronger argument for any hawk - which I have banged on about in the past - is the simple fact that producers have been able to pass on all these price rises, and then some, without suffering much of a hit to sales (or at least, not until recently). As Sentance points out, this is particularly evident in the service sector, which should have been less affected by global price pressures: "If we look at the services component of the consumer prices index, this 3-4% level rate of inflation has been a fairly consistent feature in the decade prior to the recession. There is not much evidence here of spare capacity and weak demand pushing down on services inflation. And whereas relatively high services inflation in the late 1990s and early 2000s was offset by flat or falling goods prices, this is no longer the case. So if services prices continue to rise at a 3-4% rate, and goods prices continue to be pushed up by external factors and the weakness of the pound, it is very difficult to see how the MPC will be able to return inflation to the 2% target, even over a number of years." You'll remember the counter-argument to all this - which is that the low level of pay growth will ultimately put a lid on price rises. We may have seen some of that at the retail level in recent months. But no-one can be sure, yet, that shrinking pay checks will ultimately do what the MPC has chosen not to do. As I've said before, it's a matter of judgment whether you think inflation will adjust to pay - or the other way round. But even Mervyn King would have to admit that the jury is still very much out. Which leads us to Sentance's final point, which is about the MPC's credibility. As he admits, inflation expectations may only be "flashing amber" right now. There's not much sign that the Bank's reputation for curbing inflation has been permanently hit. But underneath, he worries that the Bank's credibility has been eroded by the MPC's reluctance to take action, and that this will make things harder for the committee - not to mention the rest of us - when the Bank does finally raise rates. Once again, you don't have to agree with Andrew Sentance. Most of his MPC colleagues have disagreed with him for many months. But all should admit that he makes an important case, which should still get a hearing at the MPC, even after the person who first had the courage to make it has left.

Выбор редакции
13 апреля 2011, 14:45

Good news on jobs

  • 0

There's plenty of good news in today's labour market figures. We can all take cheer from the fact that the private sector has been creating more full-time jobs - for men and women - with ministers taking extra relief from the fact that this has outpaced the fall in employment in the public sector. With inflation running at 4%, households will not welcome the fact that the annual growth in average earnings has actually dropped back a little. Given all that we're hearing about the pressure on the High Street, it's not good news for retailers either. On average, earnings (excluding bonuses, which are highly volatile at this time of year) are growing at an annual rate of 2.2%, slightly down on the previous month. However, for the Bank of England, weak pay growth, during a period when the target measure jumped up to 4.4%, will provide welcome evidence that the inflation we're importing from the rest of the world is not becoming entrenched. Crucially, wage inflation in the private sector - which is obviously not subject to any government pay freeze - has been stable since September, when inflation was "only" 3.1%. Nationwide, the wider, ILO measure of unemployment has fallen by 17,000, though there has been a small rise in Wales. The number of people in work has risen by an impressive 143,000 - and, for once, the rise has been driven by an increase in full-time work. There are now 390,000 more people in work than there were a year ago, though still 331,000 fewer than before the crisis. That increase in total employment since the start of last year has been despite a 132,000 fall in the number working in the public sector. It's not all good news. There has been a very small rise in the number claiming Jobseeker's Allowance, but that appears to be due to recent changes in the policy towards single parents, many of whom have been moved on to that form of support. The headline rate of youth unemployment has also risen slightly, though less than many had feared. The puzzle, if there is one, would be how an economy that is supposed to have been broadly flat between December and February was able to produce 143,000 more jobs than in the previous three months. Yes, labour market figures do tend to lag behind the rest of the economy. It could be that the impact of the slowdown at the end of the year will only be seen in future months. But the experience of the past two years has been that the labour market has responded more quickly to changes in the economy than in the past. When you add this rate of job creation to the tax revenues taken in over those months, there still must be some room to hope that the fall in output at the end of the year will turn out to be a blip. It's too soon to call the peak in either unemployment or inflation, but if you're not a retailer or a saver it's been a decent week.

  • 1
  • 2